On Darwinian Economics, Self Restraint and Keynesian prophesy.

Even if you have no connection whatsoever to the financial industry, you have some inkling that we’re in big trouble. It doesn’t matter if you are so far removed from the epicenter of Wall Street that you make your own butter on the commune. Point blank you are going to live through the biggest financial crisis since our grandparents generation.

So first let me issue out a few lines of pragmatic dogma.


1. Those views expressed in this essay are those of my own, not of my company or any organization that I may be affiliated with.
2. I am not an official economist, psychologist or theologian, but am absolutely intrigued by stochastic risk probabilities and the rapper Jay-Z.
3. The thoughts expressed are a mash of economic research papers, pop-psychology and macroeconomic theory.


Lets begin. In a recent issue of the “Economist” (one of the more venerable publications) they devoted articles to the 150th anniversary of Darwin’s magnum opus “On the Origin of Species.” In what seemed to have over stimulated the religious establishment of the time my views are more of a neo-conservative on the subject matter; choosing to accept God’s Creation first and evolution as a supplement to that end. As one of my biology professors in Catholic university once said: “I don’t know about you, but it’s damn hard to explain DNA without seeing that a higher “being” coded our DNA with design.”


So in light of Darwin what does his theories have to do with economics anyway? Plenty and in some camps everything. Let me quote the article: “Music, and also art, fashion and even literature, are reckoned by many Darwinists to be the human equivalent of the peacock’s tail; done well, they show off the genetic prowess of the creator. Similarly the impulse for self-improvement that creates economic growth comes from the need to be more attractive to the opposite sex than your rivals. And most profoundly modern Darwinists reckon that a sense of justice too, is probably an evolved phenomenon.” You are seeing around media outlets blasting the mantra “Greed is no longer good” a term of the times; changing the quintessential Wall Street identity of “Greed is good.” But what is impossible of our social matrix is our need for reproduction and attraction of the opposite sex being the engine of economic growth. Let me demonstrate and show you that it is wired in us no theory necessary. You get your first job and save up money to buy clothes (economic stimulus), why? In order to look good to impress and to climb the social ladder. Hierarchy as it seems is a function of primitive human genetics and cannot be disestablished. Guys, you go and start working at 16 save all your money to do what? To buy a 2nd hand set of wheels that will get you from point A to point B. But something just happened, you have just elevated yourself in the social order of Darwinian economics. You got the car to drive girls around or attend parties to improve your chances of mate selection. All of this is the economic engine that drives our Global economy.


Now think Wall Street. Don’t let the fancy computers, cars or lavish buildings devoid your eyes of anything but the truth, it’s the jungle. And in the jungle, it’s not just about survival; it’s about out competing your rivals. Use this example: “Would you rather make $100k when all your peers are making $50k or make $150k when all your peers are making $300k?” I can assure you that your answer in your heart of hearts was the prior, “make $100k when all your peers are making $50k.” Does the truth shock us? Not really, if we can “know thyself”, we can have some advances in the fight against our inherent social destructive traits. Now think this way, why would anyone want to work on Wall Street? If they tell you anything about how they love derivatives or valuation modeling or anything to that regard, they are lying. Now I’m not saying a person can’t love the process of working in finance, but essentially a person works on Wall Street for one reason and one reason only, to make money. The only difference I see between a Wall Street veteran and a Hollywood actor is that the Wall Street veteran can have his cake and eat it too. He/she doesn’t have to worry about the paparazzi (although these days that’s changing too). No other industry can reward bankers in their early thirties salaries in the millions and senior executives in the multiple millions. This jungle that is Wall Street is no different than the peacock spreading his tail. We create products so complex that it beguiles the most talented of financial engineers and economists. We are essentially trying to replicate the hunter mentality and exploit social economics.


On the last note Keynesian prophesies. If you don’t know my man John get to know him. He is behind almost every policy decision that Obama is making or will make and controls from the grave the actions of Paulson and Bernanke. Cambridge educated, Keynes’ contribution to society was his friendship to Roosevelt during the great depression and of course his: “General Theory of Employment, Interest and Money.” He is the father of modern macroeconomics and I pay ode to him each and every day. So what does Keynes have to do with you? A whole lot more than you think as of right now and I’m going to try and close the gap. In economic theory and I won’t make it sound too nerdy we have generally accepted relationships. What do I mean? For example in the long term when interest rates go up there exist an inverse relationship with inflation that says that it should go down. This is how the Fed manages through monetary policy. You have these relationships with lots of things like unemployment and inflation or other macroeconomic variables. But these “relationships” change in the short term and in the period of time that we’re in now, they are all converging. Meaning they are moving together when generally speaking what should invoke inverse relationships are now moving together. Now in 2009 when Obama takes his seat, he will be expected to have a playbook, a guide to exposit and rule from. The only similar economic cycle even close to what’s happening now is from the end of 1929 to early 1930. Keynes took center stage with Roosevelt and Roosevelt’s New Deal is a direct translation of Keynesian theory in action. Here’s the part that will frighten you even more. In the same period the Dow Jones Industrial Average fell 48%, much like the 50% the S&P has fallen this year. But if we thought that was the end of the fall, boy were we wrong. The Dow went on to lose another 90% in value from 1930 to 1931. One out of every fourth person was unemployed; we had deflation of –22% and surprisingly the policy rate of 0.25% that the Fed just dropped it to is also the historical Fed funds rate during the great depression.


Taking a page out of history we would be inept if we didn’t consider the possibility of the same or worse happening. And we would be doubly ignorant if we thought that we were more evolved than our predecessors or that we could escape from the same Darwinian economics that govern our nature. However, there is something amazing that God endowed us with that animal’s lack, the ability to reason. Not reason in the sense of mediated negotiation, but reason in the Greek sense of logic. Plato, my favorite Greek philosopher said in metaphysics that the inherent nature of Man is to reason, but he could not answer why and for what cause. In other words: “Why did humans have the ability to reason?” His final conclusion was that it was to recognize that we were given this ability to understand our Creator, or as he put it, The Beautiful. Therefore if we are to survive through the perils of economic crisis, a level of self-restraint and humility needs to be enacted in order to understand the inexplicable predicament to which we now find ourselves. In a presentation that I was giving about a month ago, I used the example of using a financial tool called Stress Testing like a compass to navigate through the fog of perilous waters. After the adrenaline faded and the audience settled into the message, I kept thinking to myself: “Are we ready for this?” Well my friends I’ll have to break it to you and the answer is no we are not ready.


Advice for myself as well as you:


1. Trust in God, you’ve got nothing else.
2. Cash is king in deflationary period convert to cash. Personal opinion is to diversify into global reserve currencies. Dollar and Euro, maybe Yen.
3. Buy assets during deflationary period and hold during hyperinflation immediately following the economic stimuli.